Can you borrow money against term life insurance?
The short answer is no. But there are some types of life insurance policies you can borrow against. Here’s what to know.
We get it: Life happens, and sometimes, you don’t have enough money to cover your expenses. Fortunately, when that happens, there are financing options to pick from. You can even take out a loan against the value of some long-term investments, such as your house or 401(k).
But what about life insurance? Can you take out a loan against your term life policy? The short answer is no, but you can take out a loan against other types of life insurance policies.
Here’s everything you need to know about the pros and cons of life insurance policy loans — including the potential downsides of taking one out.
In this article:
Why would you want to borrow money against life insurance?
Permanent policies, including whole and universal life, don’t just provide life insurance coverage. They also include cash value savings components on top of death benefits.
With cash value policies, part of your premium payments goes towards your death benefit. The other part goes towards your cash value and accrues interest over time. How that interest accrues will depend on the policy type:
Whole life policies use a predetermined formula that guarantees cash value growth over time. Some policies may be eligible for dividends, which aren’t guaranteed but can increase cash value growth.Universal life policies’ cash value growth is based on current interest rates which may fluctuate each year.Variable life policies invest money from cash value accounts into subaccounts, which work like mutual funds. Your cash value then increases (or decreases) based on the performance of those subaccounts.
As your cash value builds up over time, you can utilize it in several ways, including taking out a loan against your life insurance policy. Essentially, you use your cash value as collateral for the loan.
And policy loans do have advantages over other types of loans. You might want to take one out because of the easy qualification process, lower interest rates, or other significant upsides.
Qualification is easy
Policy loans are much easier to qualify for than other loan types. When you apply, you won’t have to undergo a credit check, verify your income, or meet any minimum income requirements.
Instead, insurers set a minimum cash value amount you need to qualify for a loan. Approval is usually automatic once you meet that threshold.
You don’t need additional collateral
Because your policy acts as collateral, you won’t have to risk personal assets like your car or home to get a loan. That can make policy loans seem like a safer option. But if you die before paying back your loan, your insurer will deduct the remaining balance from your death benefits, leaving your loved ones with less.
There are no spending restrictions
Policy loans have no spending restrictions, so you can put the money towards anything you need.
You get quick access to funds
You can get cash from a policy loan deposited into your bank account within a few days. Because approval for a policy loan is also fast and easy, you can use the funds as a stop-gap measure while you wait on other financing options, like a personal or business loan.
Policy loans have lower interest rates
Insurance companies don’t take on any risks by issuing policy loans. Your loan can’t exceed the cash value in your account, and even if you fail to repay it, your insurer can deduct the balance from your death benefit payout. Because of that, the interest rates on policy loans are typically much lower than on other loans.
Your cash value account continues to accrue interest
When you take out a policy loan, you use your cash value as collateral instead of withdrawing from it. So, the money stays in your account and continues building interest over time.
There’s no set repayment schedule
Policy loans don’t have fixed repayment schedules, so you can pay your insurer back as quickly or slowly as you want. But remember, the interest on your loan will continue building over time. And if your owed amount exceeds your policy’s cash value, your life insurance coverage can lapse, endangering your death benefit.
Why is it risky to borrow against your life insurance?
Policy loans do come with downsides. You take on serious risks by borrowing against your life insurance; each new loan can threaten your family’s financial security.
Loans can reduce your death benefit
You secure policy loans by using your cash value as collateral. And just as with any other secured loan, if you fail to repay the money you borrowed against your life insurance policy, you lose your collateral — in this case, a portion of your death benefit.
After you die, your insurer subtracts the amount you still owe from the death benefit your loved ones should have received (the death benefit you chose for a reason). You don’t want to leave your loved ones scrambling to cover costs or pay off debts, and taking out a policy loan can cause just that.
Your policy can lapse
A reduced death benefit is bad enough. But if you pay your loan back too slowly, your coverage can lapse. That’s one of the hidden dangers of having no repayment schedule.
Interest on your loan keeps accruing whether you make payments or not. If you don’t pay off that interest each month, you might owe more on the loan than your policy’s cash value is worth. When that happens, your coverage will lapse, putting you and your family in danger of losing your death benefits.
You may owe taxes
Policy loans and cash value usually aren’t treated as taxable income, but there are exceptions you need to be aware of, including:
If you fail to repay your loan.If your policy lapses.If you surrender your policy for its cash value.
All become an issue when the amount you owe or receive exceeds the amount you’ve paid in premiums. The IRS treats the difference between those as a gain on investments and requires you to pay income taxes.
Additional downsides
As you can see, policy loans come with some serious risks, but there are a couple more downsides that can make these loans an unrealistic financing option:
Cash value minimums: Some Insurance companies require you to meet a minimum cash value amount before you can request a loan. And since cash value builds slowly over time, you may have to wait years to qualify for a loan.Loan limits: Insurers set loan borrowing limits based on your accumulated cash value. The exact limit varies between insurers, but you typically can’t request a loan for more than 90% of your cash value. If you need more than that, you’ll have to look into different financing options.
Can you borrow against a term life policy?
Term life policies don’t have cash value components, so you cannot borrow against them. For many people, that’s a feature, not a bug. That’s because you can get excellent life insurance coverage at an affordable price, and avoid the hazards of a policy loan.
Unlike permanent policies, your term life policy’s death benefit can’t be reduced. You always know exactly how much coverage your family has, which makes it much easier to plan for the future.
Term life insurance plans offer simple, easy-to-understand coverage without any added risks. All you need to do is pay your premiums.
If you die during your policy term, your insurer will pay out your death benefit. If you don’t, well, the good news is you’re still alive and kicking. (You can also apply for more coverage if you still need it.)
You’ll also pay far less for a term life policy. Permanent life insurance policies offer lifelong coverage, so insurers set premiums high to offset the cost of guaranteed payouts.
Let’s say, for example, that you want a policy with $500,000 in coverage. On average:
A 30-year-old man will pay, on average, $387.67 in monthly premiums for a whole life policy, according to NerdWallet. For a 30-year Haven Term policy, that same 30-year-old man in excellent health would pay $29.99.A 50-year-old man will pay, on average, $930.25 in monthly premiums for a whole life policy. At Haven Life, that same man, in excellent health, would pay $77.67 per month for a 10-year term life policy.
Over the years and even decades to come, that difference adds up.
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Our editorial policy
Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
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Our disclosures
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus
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Cheapest we could find, simple application, didn’t require a health screening since I’d had a recent physical. Quick answers from customer service both times I had questions for them.
Easy process, painless, pretty quick turnaround. great rates!
Easy online application and the decision on my coverage came within 24 hours.
Oh my gosh. I am finally writing a review after a week of daily begging from Haven Life. Pretty good experience overall but it is life insurance. So a bit of a pain and not very transparent as to what is affecting rates. I got a good policy approved in under a month which is great. My rate was surprisingly high. I have several mild health issues but taken together they probably provide cover to rate my higher risk. I am pretty sure I could have gotten (and may still) a better rate if I had gone the traditional route. But that is even more invasive and time consuming. I am giving a 3 because of rate and lack of reasons for rate and because – it is life insurance – which in my experience is never very pleasant.
